What to Do If You Were a Victim of Excessive Trading (Churning)?

Recently, the SEC Office of Investor Education and Advocacy released an official alert warning investors to be on the lookout for broker excessive trading. Excessive trading, also known as churning, occurs when a broker or broker-dealer make unnecessary transactions on an investor’s account, solely for the purpose of generating increased commissions and fees for themselves.

Excessive trading is prohibited by federal and state law, along with FINRA industry rules, most notably Rule 2111, which requires that all trades must be suitable for a customer’s individual investment objectives. Unfortunately, many registered stockbrokers still commit this very serious violation. Here, our experienced South Florida stockbroker fraud lawyer explains what you should do if you believe that you were the victim of excessive trading.

How to Identify Excessive Trading?

To check to see if your broker is churning your account, you will need to review your records, including you account statements and confirmations of purchase and sale for two things:

The total volume of transactions, and

The character of all trades.

If there is an especially high number of transactions in your account, you may be paying too much in fees to ever make a positive investment return. You should find out the turnover ratio of your account. A turnover ratio above four merits typically warrants further investigation.

Additionally, if your broker is making trades without proper justification for each transaction, you could also be the victim of churning. For example, if your broker sold a stock, then immediately purchased that same stock back, you paid transaction fees twice to essentially end up in the exact same place.

Take Action: Three Things You Should Do

Gather All Relevant Records and Documents

Ultimately, if you are considering making a legal claim, you will need strong supporting evidence. One of the best things that you can do you to protect yourself is to carefully assemble all documents and records related to your account. Get copies of your account statements, confirmations of purchase and sale along with all correspondence that you have had with your broker and brokerage firm.

Ask Your Broker For an Explanation of the Trading Strategy

Your broker has a professional duty to follow a trading strategy that is sensible and suitable for your specific needs. If you believe that your financial broker is making excessive or unauthorized trades, you have a right to ask for a clarification of their investment strategy. Specifically, some questions you should ask include:

What is the rationale for the investment strategy and all of the trading activity?

How much have I paid in total commissions and transaction fees?

What return of investment would I need to make to simply break even, after all fees are applied?

Be sure to get written confirmation of all of the of your broker’s answers to these important questions.